MEXICO'S FINANCIAL UPHEAVAL : More Help on the Way : U.S. Readies at Least $25 Billion in Loan Guarantees

DOYLE McMANUS and JOHN M. BRODERTIMES STAFF WRITERS

President Clinton and congressional leaders from both parties promised Thursday "to do what is necessary to restore financial confidence in Mexico" as Clinton proposed at least $25 billion in loan guarantees to prop up the peso and head off a deeper economic crisis.

Clinton and other U.S. officials launched a determined effort to assure world financial markets of their intention to stabilize Mexico's economy, saying they want to stop the financial crisis from snowballing through other vulnerable emerging economies in Latin America and other parts of the world.

"We want . . . to shut down the problem and not allow it to fester," a senior official told reporters at the Treasury Department.

News of the huge new aid package, which comes on top of an $18-billion international credit line promised last week, proved effective even before it was announced. Reports of new U.S. financial backing sent both the peso and the Mexico City stock market upward for a second consecutive day.

The Mexican stock exchange index soared 90.95 points, or 4.49%, to 2,118.82. The peso also rallied again, to 5.5 per dollar from 5.65 at Wednesday's close. It stood at 3.4 pesos to the dollar before the Mexican crisis was triggered by the peso's devaluation Dec. 19.

Markets also rallied Thursday in Brazil, Peru and Argentina, where the Mexican crisis has caused jitters and driven stock prices down steeply for three weeks.

In addition to the prospect of a U.S. bailout, traders were encouraged by the Mexican central bank's more immediate step to build confidence by agreeing to purchase up to $1.5 billion worth of dollar-indexed bonds, called tesobono s, held by Mexican banks and securities firms.

While foreigners hold about 80% of the $26 billion in tesobono s outstanding, buying up the portion in domestic portfolios was expected to ease pressure on the bonds and, thus, the peso.

Clinton summoned Republican and Democratic congressional leaders to the White House to get their blessing for the aid package, which officials said was designed so it would impose no cost on the federal budget.

In an unusual joint statement, Clinton, House Speaker Newt Gingrich (R-Ga.) and the other legislative leaders formally endorsed the plan--a move Clinton hopes will prevent the aid from becoming a partisan political issue.

"We agreed that the United States has an important economic and strategic interest in a stable and prosperous Mexico," the statement said. "Ultimately, the solution to Mexico's economic problems must come from the people of Mexico, but we are pursuing ways to increase financial confidence and to encourage further reform in Mexico. We agreed to do what is necessary to restore financial confidence in Mexico without affecting the current budget at home."

Clinton telephoned Mexican President Ernesto Zedillo immediately after the meeting to brief him.

In a bow to the power of Congress' new Republican leadership, Clinton spokesman Mike McCurry noted that the joint statement was being released simultaneously at the White House and the GOP-led Capitol.

Administration officials said they would deliberately hold off on publicly announcing details of the plan to give congressional leaders time to sell the idea to their colleagues. The loan guarantees require approval from Congress.

One aide said the legislators warned Clinton that both Congress and the public are likely to be hostile to a big bailout package for Mexico--unless the Administration mounts "a real determined effort" to explain both the need for the aid and the likelihood that it will not cost taxpayers.

Nevertheless, a senior official said, Clinton and the congressional leaders reached basic agreement on the package.

"There were no unresolved, potentially contentious issues in this area," he said.

Officials said the Administration is proposing a package in the range of $25 billion to $40 billion in loan guarantees that would enable Mexico to borrow money at more reasonable rates because of U.S. Treasury backing.

"This is a loan guarantee. It is not a grant. It is not foreign aid," a Clinton aide emphasized.

The guarantees will not cost the Treasury money as long as Mexico avoids defaulting on the loans. However, U.S. law normally requires that the Treasury set aside a sum of money to cover the possibility of default--an amount that would cause a charge to the budget.

To avoid the budget problem, Administration officials proposed an arrangement under which Mexico's central bank will pay the required "set-aside" amount as a fee to the United States, thus relieving the Treasury of any cost.

The Bush Administration employed a similar gambit in 1992 to provide $10 billion in loan guarantees for Israel without creating a charge against the U.S. budget.

The package for Mexico was assembled jointly by Treasury Secretary Robert E. Rubin--on only his third day on the job--and Federal Reserve Board Chairman Alan Greenspan, working together with aides to Zedillo, officials said.

In a signal to show that the Fed supports the loan plan, Greenspan appeared in the White House press briefing room as the plan was announced, although he declined to speak on the record.

Officials said the statement's insistence on encouraging further reform in Mexico is aimed partly at heading off possible complaints in Congress that the loan guarantees would allow the Zedillo government to continue running the kind of budget deficits that helped cause the financial crisis.

Even before the aid plan was announced, several Democratic members of Congress who had opposed the North American Free Trade Agreement with Mexico pronounced themselves opposed to any loan guarantees. "American workers . . . are being asked to support tens of billions of dollars in loans to Mexico to prop up an economy that shows no signs of being able to support itself," complained California Rep. George Miller (D-Martinez).

Republicans such as former Secretary of State James A. Baker III largely supported the move.

The Mexican economy has been in crisis since Dec. 20, when Zedillo's new government, beset by inflation and debt, abruptly devalued the peso by 15%.

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Staff writer Juanita Darling in Mexico City contributed to this report.

* MARKET BEAT

Currency devaluations are becoming a global problem. D3

Boost From a Bailout

Stock exchanges in Mexico and Latin America made gains Thursday after the United States proposed more help for the battered Mexican peso. Daily closes since Dec. 20 on stock exchanges in Mexico, Brazil and Argentina: